Lapse Effects on Level Premium

When level premium term insurance first became popular, the industry recognized two long-term risk factors – mortality and persistency. Life insurers understand mortality.

Lapses, however, driven by policyholder behavior, are more uncertain and can impact profitability throughout the life of the policy. If lapses are too high in the early years of the level term period, profitability will be reduced due to the smaller premium flow available to amortize issue expenses. If lapses in later durations are too low, there is less reserve released than expected.

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